Wednesday, 26 July 2023 09:40

Today's market analysis on behalf of Samer Hasn Market Analyst and part of the Research Team at XS.com

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Gold continues to consolidate above levels of $1960 an ounce today, with anticipation of the Federal Open Market Committee (FOMC) interest rate decision.

The markets are almost completely expecting the decision today to be in favor of a 25-basis point hike. However, the focus of the markets will actually be on the tone of Jerome Powell's speech after the announcement of the decision. Where the markets are trying to strengthen their hypothesis that this expected hike today is the last in the path of monetary tightening followed by the Federal Reserve, which pushed interest rates to the highest levels in decades.

Today's Fed rate decision follows the many figures we saw earlier this month that indicated a continued slowdown in inflation. Annual inflation fell to 3% in June compared to 4% we had seen last May, the weakest reading since April of 2021. We had also seen annual core inflation, which excludes food and energy prices, decline to 4.8% in June. Compared to the 5.3% we had witnessed last May.

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These figures, despite the significant decline recorded, are still higher than the Fed's targets at 2%. Accordingly, Powell may indicate in his speech today that keeping inflation away from the Fed's targets may necessitate maintaining monetary tightening and keeping interest rates at their current levels throughout this year. While the continuation of the hawkish speech from the Fed may keep pressure on gold prices and may prevent them from regaining their previous gains at levels above $2000 an ounce.

Also, gold may benefit from the expected pressure on the US dollar in the event that the European Central Bank maintains a very hawkish tone with its announcement of the interest rate decision tomorrow, Thursday, with the expectation that it will also raise by 25 basis points. We also await more data from the economy, both from the US GDP numbers for the second quarter, as well as the personal consumer expenditure price index (PCE) figures for June.

As for the US bond markets, we witnessed a decline in the yields of two-year Treasury bonds - which are highly sensitive to changes in short-term interest rates - to 4.839% during the peak of yesterday's declines, and down from 4.926% at the close of the previous session. While the declines in bond yields may reflect market expectations that monetary tightening will actually end, which may support gold prices.

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